Pre-qualification
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Pre-Qualification
Evaluating a set of standardized borrower and property (or other collateral) risk based pricing factors. Utilized to assess and mitigate risk for loan approval and underlying terms, or to decline the file.
Increased risk equals increased cost, usually through the interest rate of the underlying mortgage. The following factors and their derivatives affect the type, rate, and terms of a mortgage:
Loan Purpose, Property Type, Property Use, Mortgage Loan Documentation, Middle credit score (between the 3 major repositories, Equifax, Trans-Union, and Experian). Loan Amount, Real estate appraisal value, (Use Purchase Price, if loan is a purchase), Loan-to-value ratio, Debt-to-income ratio, and number of months of mortgage history.
Pre-qualification is a term of art in retail finance, and means that a loan officer has taken some information from the borrower, and made a tentative decision, but not verified any of it.
With a pre-qualification, the borrower typically has not stated their social security number or other identifiers, so it is not possible to check credit. A borrower will give their employment, income and asset information and the amount of current monthly debt. In addition a borrower is asked about their general credit worthiness.
Based on this quick work up the borrower will be told that they pre-qualify for a certain loan amount. For example, if the borrower makes $15/h or $2600/month this is then calculated to an industry-standard ratio of debt to income, for example 36%. So if a borrower makes $2600/month they would be pre-qualified at a total debt of $936 (this includes any monthly payments, including car & credit card min. amount; along with the proposed payment of principal, interest, taxes and insurance).
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